The Reserve Bank of India has finally decided to bite the bullet, and one only hopes it's not too late. There is a view that the half per cent rate hike the RBI announced in its monetary policy review on Tuesday should have come a while back: the six or seven quarter per cent hikes in the last few policy reviews had failed to temper rising inflation.
Since December 2009, the RBI impounded `50,000 crores through cash reserve ratio requirements (the amount that banks keep with the RBI, which are frozen). Since none of these “baby steps” — as RBI governor D. Subbarao described his earlier policies — could curb inflation, he decided to adopt a more hawkish stance. As he himself noted, this was a demand side problem, very different from the supply side problem seen since 2009. This was reflected in high food prices, particularly of pulses, the poor man’s protein. Food prices remained stubbornly high despite a good monsoon and good rabi crops, defying the pronouncements of mandarins in the Planning Commission and the finance ministry who looked to the rain gods for help in wriggling out of the inflationary spiral.
The RBI’s latest move aims to curb the demand syndrome, which is driving inflation. There is a lot of disposable income chasing too few goods. The rising cost of raw materials saw manufacturers pass on cost increases to consumers, who paid without grumbling. The RBI is trying to temper this demand. We will know in a few weeks if it works as there is a time lag before the effects of policy pronouncement are visible. The government is surely aware, though, that it is the common man who will be hit the hardest as loans will get more expensive and salaries and wages will not be able to keep pace. Those who have taken home loans and personal loans will be hit the hardest, followed by those with car and other loans. The middle class and the poor will feel the impact; the rich will continue to splurge on everything, from real estate to automobiles, with abandon. And things can get worse — whether it is commodity prices like metals and minerals or crude oil, nothing is likely to cost less, at least in the short term. In fact, the RBI has already warned of “hidden inflation” waiting to surface — in the form of a hike in petrol and diesel prices. The government has been waiting for the state elections to get over; and a fuel hike is expected to be announced soon after the Assembly poll results are out. The hike might well be justified in the light of increasing international crude prices, but it would add to the burden of the middle class and lower income groups. The rich will continue to guzzle petrol even if its price goes up to `100 per litre!
The government is yet to visibly demonstrate that it is serious about tackling the problem — at least on the food front. Why should vegetables and fruits be so expensive? Is it so difficult to grow these to meet the rising demand? If the prices of food, vegetables and fruits remain high even when there is a good monsoon (such as last year), what should we expect if this year’s monsoon is not as good as it was in 2010? There is something very wrong in the handling of the economy. There is little time left: unless the government gets its act together swiftly, and works decisively to tackle the question of rising prices, the middle class and the poor are in danger of getting crushed by inflation.